Decentralization of governmental fiscal responsibility has been a component of much economic reform, providing contradictory evidence of the economic consequences. The case for fiscal decentralization rests on the assumption of heterogeneity of regional preferences or the benefits of competition. When communities have heterogeneous tastes, the government closest to the citizens can deliver a bundle of services that reflects community preferences. Similarly, the Tiebout model (1956) posits that, with capital and labor mobility, local governments are motivated by competition with other governments to provide public goods efficiently. Alternatively, centralization may work better when externalities are present, or.
